Friday, May 15, 2009

ELSS Mutual Funds are best investment option over 3-5 years

Nobody loves to pay taxes. Unfortunately there is no way you can avoid it. Once, you cross a certain income level, you have very few ways to save taxes. That explains people’s obsession with the overcrowded section 80 C of the Income Tax Act. It covers scores of avenues—employee’s provident fund, public provident fund, tax saving schemes from mutual funds, national savings scheme, five-year fixed deposits and so on—which allows one to invest up to Rs 1 lakh and claim tax deduction.Among these, tax saving schemes for mutual funds (also known as equity linked savings schemes or ELSSs) was the in-thing among “yuppie’’ investors till a few years ago. However, the scenario is a little different this year. The depressed stock markets, coupled with economic uncertainties—both on the domestic and overseas front—have forced many bravehearts to reconsider their decision to park money in ELSSs.

“Even before the beginning of the financial year, my customers have been calling up to say that they don’t want to renew their systematic investment plans (SIPs) in ELSSs this year,’’ says a financial advisor here. “The stock market has given huge negative returns in the last year and all equity schemes, including tax saving ones, were down 35-50%. People don’t have the stomach to lose capital in the current environment, be it even for a short period,’’ he adds.

Thanks to the revival of the stock market lately, some investors are rethinking, while a small section has already resumed its SIPs, say some investment consultants. And they aver that it is the right thing to do. “If you have a 3-5 year timeframe in mind, you should go for ELSSs. The market may be down in the short term, but you still have the potential to earn better returns in a long period,’’ says Sajag Sanghvi, a certified financial planner (CFP). “If you have decided to invest in equity as per your asset allocation plan, then you should go ahead and put the money in tax saving schemes,’’ he adds.

According to financial experts, there are many advantages of ELSS tax saving option. To begin with, the SIP option would help you start tax planning from the beginning of the financial year. It also imparts a certain financial discipline to your life. “For most people, tax planning is a last-minute rush in March, just before the end of the financial year. They also put money arbitrarily without giving much thought, mostly influenced by the market conditions at that time,’’ says a mutual fund manager. “If they start the process in the beginning of the year, they don’t have to scramble for funds in the last minute. They will also benefit from downward movement in the market,’’ he adds.

One can also hope to pocket superior returns vis-a-vis others in the section 80 C basket. Other options like EPF, PPF, five-year FD, among others, offers fixed rate of return (currently around 8%,), whereas ELSSs (at least in theory) can give you nearly 15%. “One year, stocks may be down 50%, but over a period of 3-5 years you can hope to get an average return of 15%,’’ says Sanghvi. This is because historical data indicates that stocks have the potential to outperform all other asset class in the long run. ELSSs can also beat other equity MF schemes, as they have a mandatory 3-year lock-in period. “This gives us freedom to invest in stocks with huge potential and wait for unlocking of value, whereas in an open-ended fund this is not possible,’’ says a fund manager. “Though ELSSs didn’t outperform the last rally, on previous occasions the category has managed to outperform other equity schemes,’’ he adds.Source: TOI

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